How Much Corporation Tax Will Your Small Business Pay in 2022 and 2023?

For the last 5 years, Corporation Tax has sat at a record-low level of 19%, but from April 2023, it’s set to rise. The government’s decision to raise Corporation Tax comes in a bid to increase revenue whilst remaining competitive with other economies.Although a tax increase is unlikely to get a warm response, ACCA states that 1.4 million companies are expected to be unaffected by this change and the UK’s Corporation Tax will still remain the lowest in G7 countries. Let’s take a look at the proposed details.

What will Corporation Tax be from April 2022?

For the financial year beginning April 2022, the Corporation Tax rate will remain at 19%.

What will Corporation Tax be from April 2023?

From 1^st April 2023, the rate will increase to 25% – but not for everyone. Instead of a flat rate for all, a Main Rate and Small Profit Rate will come into play, along with Marginal Relief, meaning that the amount of tax you pay will depend on your company’s profits. The government states that this will help bridge the gap between small and large businesses and will provide a gradual increase to Corporation Tax. You can find out more via HMRC’s policy paper.

Who pays the ‘Main Rate’ and who pays the ‘Small Profit Rate’?

Companies whose profits are over £250,000 will pay the Main Rate of 25%. A Small Profit Rate will apply to companies whose profits are less than £50,000 – these companies will continue to be taxed at 19%.

For those with profits in between these figures (£50,000-£250,000), tax will be set at 25%, but these companies will be eligible for Marginal Relief which will reduce their effective tax rate.

What is Marginal Relief?

Marginal Relief creates a gradual increase in the rate of Corporation Tax, bridging the gap between the small profit rate and the main rate. If you look at your company’s profits in relation to the upper (£250,000) and lower (£50,000) limits, you can work out your effective tax rate based on where you sit on the sliding scale. It’s worth noting that the limits will be reduced for companies with associated companies or for those who have an accounting period of less than 12 months.

Considering Marginal Relief, how do we work out our effective rate of Corporation Tax?

From a financial planning perspective, it’s vital that you know your company’s tax rate in advance. So if you’re eligible for Marginal Relief, there are plenty of ways you can work out your effective rate of Corporation Tax.

Firstly, you could work it out manually if you wish (SKS Business Services gives a clear calculation) but, unless you’re a keen mathematician, it can be tricky and you run the risk of miscalculating it and ending up with a surprise tax bill. Otherwise it’s best to contact your accountant for as clear a view as possible on your future Corporation Tax rate.

If you’d like to find out how you can minimise your Corporation Tax exposure, why not contact us for a free, no-obligation consultation? Just fill out the form below and one of our experienced accountants will be in touch!